Friday, August 30, 2013

Jared Bernstein is a bad, and dangerous, economist

No serious academic economist considers economics a science on par with physics. At best it is comparable to biology; there are some clear, predictable outcomes but because the objects that are studied are constantly adapting and changing extrapolating the results of any particular study to a species of animal as a whole in the case of biology or humans as a whole in the case of economics can lead to erroneous predictions. Many studies need to be done on many different samples under various conditions before economists reach a consensus on anything, and often a consensus is not reached even then. 

Jared Bernstein, a man with no formal economic training but who somehow became VP Joe Biden’s main economic adviser, recently wrote a piece for the Huffington Post acknowledging that economics is not a hard science. Good for him. Yet despite his statement that economics “cannot tell you what will happen, nor will it ever be able to do so”, he basically calls for economists to pretend that they are physicists in a never ending quest to identify and correct market failures. Mr. Bernstein says that “A key component … is the part of economics that I think is the most important: identifying market failures. The best and most useful economists these days are the ones who spot ways in which markets are working badly or not at all.”

I could not disagree more. The government is so involved in markets today that finding a true market failure that is not in reality government induced is like finding a needle in a hay stack. But even if market failures were abundant (they are not), would we really want someone like Mr. Bernstein, a man who admits that even correctly predicting what happens when prices change is beyond the scope of economics, creating and implementing policy? He cannot possibly know what will come of his policies if he thinks that the law of demand is suspect sometimes.

I think economics and the economic way of thinking can correctly predict a lot more than Mr. Bernstein acknowledges. The field of public choice can often predict a politician’s behavior with stunning accuracy. It is often correctly predicted that price ceilings and price floors will lead to shortages and surpluses respectively. The simple supply and demand model can qualitatively predict all kinds of scenarios, even if getting an actual magnitude of the effect proves difficult.

Economics is far more useful than Mr. Bernstein recognizes; not only for its ability to predict behavior but as a way of viewing the world. Unfortunately Mr. Bernstein doesn’t really understand economics and wants to use the economic concept of externalities along with taxes and subsidies to embark on social engineering projects under the guise of “correcting” markets. This is a dangerous endeavor for even an expertly trained economist but for someone holding only a PhD in social welfare like Mr. Bernstein it is absolutely frightening.

Good economics is studying social interactions, voluntary exchange, and analyzing how and why people make choices in a marketplace. Good economics is not some bureaucrat restricting those choices for individuals in a faulty effort to save them from themselves or the “evil” marketplace. Good economics is also about analyzing the secondary consequences of policies. It is not enough to impose a tax on carbon and then say “hey look, we will have less carbon now.” What else will happen? The effects do not stop at the carbon market; they will ripple throughout the economy. A good economist will trace them all out and weigh the costs vs. the benefits. This is something that social engineers like Mr. Bernstein often fail to do. And this is why he is a bad economist.

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